On August 14, 2013, RBI made 5 important changes to address the depreciating rupee. Whenever RBI takes such measures, NRIs are sure to benefit.
Two changes are aimed at attracting foreign exchange from NRIs in long term NRE or FCNR bank deposits and other three are related to preserving the foreign exchange by restricting access of foreign exchange to residents.
As a result of these changes, NRIs stand to get higher TAX FREE interest on NRE and FCNR deposits of 3 years and above, even higher than resident Indians. For NRIs, this offer a unique opportunity to transfer more foreign currency at historically higher foreign exchange rates – Rs. 61 / USD, Rs. 96 / GBP etc and earn higher interest.
All 5 changes are explained and analyzed as follows:
1. Deregulation of Interest Rates on Non-Resident External (NRE) Deposits:
While RBI deregulated the interest on NRE deposits on December 16, 2011, there was a condition that the interest rate on NRE FDs cannot be higher than those offered by them (banks) on comparable domestic rupee deposits.
However, on August 14, 2013, RBI gave freedom to the banks to offer interest rates on NRE deposits with maturity of 3 years and above without any ceiling.
It means that NRE FD rates for deposits of 3 or more years CAN BE HIGHER than the Rupee deposits given to residents. This is applicable to NRE deposits only. The extant ceiling on NRO Accounts shall continue and interest rate on NRO deposits cannot be higher than those offered by banks on comparable domestic rupee deposits.
It is Important to note that the deregulation of NRE deposits will be valid up to November 30, 2013 only, subject to review.
2. Interest Rates on FCNR(B) Deposits:
Interest rates on Foreign Currency Non Resident (FCNR) Deposits on various currencies for maturity of 3-5 years are increased by 1%. The revised ceiling on FCNR deposits are as under:
|1 – 3 years||LIBOR/Swap+200 bps (2%)||No change|
|3 – 5 years||LIBOR/Swap+300 bps (3%)||LIBOR/SWAP+400 bps (4%)|
It is Important to note that the increased limit on FCNR deposits will also be valid up to November 30, 2013 only, subject to review.
3. Limit on Liberalized Remittance Scheme (LRS) for Resident Individuals Reduced to USD 75,000:
Resident Individual was allowed to remit upto USD 200,000 per financial year (April – March) outside India for any permitted purposes. RBI reduced the limit of USD 200,000 per financial year to USD 75,000 per financial year with immediate effect. As a result, remittances of up to USD 75,000 can only be made for any permitted current or capital account transaction or a combination of both per year.
Accordingly, the limit of Gift or Loan to NRI close relatives by resident individuals is also reduced to USD 75,000 per financial year. So now, resident individuals can only give gift upto USD 75,000 to their NRI close relatives.
Within this limit, resident individuals are allowed to set up Joint Ventures or Wholly Owned Subsidiaries for bonafide business activities outside India. It was also mentioned that the scheme should not be used for making remittances for any prohibited or illegal activities such as margin trading, lottery etc.
4. Restriction on Acquisition of Immovable Property Abroad by Residents
In addition to reducing the limit under LRS, RBI has restricted the acquisition of immovable property, directly or indirectly, outside India by resident individuals. No remittances can be made under the Liberalized Remittance Scheme (LRS) Scheme for acquisition of immovable property outside India.
5. Reduction of limit for Overseas Direct Investment (ODI) to 100% of Net Worth
An Indian party was allowed to invest in Joint Ventures (JV) or Wholly Owned Subsidiaries (WOS) as Overseas Direct Investment for any bonafide business activity upto 400% of the net worth of the Indian Party as on the date of the last audited balance sheet under the Automatic Route.
The limit was reduced from 400% to 100% of the net worth of the Indian Party under the Automatic Route as on the date of the last audited balance sheet. And, any ODI in excess of 100% of the net worth shall be considered under the Approval Route by the Reserve Bank of India.